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Here is a very interesting speech by Andrew Lo at MIT on financial engineering: how it caused the financial crisis, what purpose it serves in society (managing incentives), and how we can use it to cure cancer and solve other major challenges.

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There is a huge untapped resource in the US today and that is human productivity. Everyone knows that the unemployment rate sits at 9.1%, but that is just a statistic. You need to think of what that represents. The number of people this comes out to is about 16-17 million people if you include "discouraged" workers, and the number is even higher if you include underemployed people. [more]

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I think whoever said "think about a stock like you own all of it" did a lot of damage to investors, especially small investors who cannot possibly have any say in the business. Because in reality, a lot of value destruction happens between the time when a firm gets the cash and when the cash gets sent out to shareholders. This happens in stocks of all types, but many stocks go from the cradle to the grave without paying a single dividend, despite being profitable for an extended period of time. The destroyed value of the cash flows received by these companies is 100%.

The intrinsic value of any stock is not discounted cash flow to the firm or liquidation value. It is discounted cash flow to the shareholder. The problem I have with net-nets is that 99% of them will not return one cent of cash to shareholders during their entire lifetime. The intrinsic value for these stocks turn out to be zero. So you'd be relying on a greater fool to make money.

To value a net-net, I would first estimate a conservative fair value based on assets in liquidation like any net-net investor would. Then, you have to estimate what is the chance that it will actually start paying a dividend in the future or liquidate? Take that probability and multiply it by the liquidation value. Then, estimate how many years until they start doing it? Discount the liquidation value back that many years to account for the value destruction of idle cash. The final value is probably much much lower than share price. [more]

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“With one brief exception, the federal government has been in debt every year since 1776.... Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years...

The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits...” [more]

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Netflix's recent debacle with the price hike and splitting of their DVD and streaming businesses has gotten a lot of attention lately, and on the face of it, it looks like they were what caused the stock's decline. But I believe these problems are only symptoms of much more serious issues. At worse, they have only accelerated an already ugly situation. [more]